Ranking the World’s Priciest Cities

ByCarl Bialik

My print column examines ubiquitous city cost-of-living rankings, which place the world’s urban centers by how expensive they are. Though these rankings usually are reported as if they are universal, they are based on the spending habits of a tiny sliver of the population: expatriates at an executive level who take their spending habits with them around the globe.

“The purpose is to help companies who are moving staff to work in other countries to know how much they should pay assignees so they’re not losing out — to make sure they’re no better or no worse off by going to another country to work,” said Steven Kilfedder, ECA International‘s London-based cost-of-living manager.

“It might be useful research for American executives who are going to work overseas and are paid in dollars,” said Tann vom Hove, a senior fellow at the City Mayors Foundation, a London-based think tank on urban life and economics. For local residents, “the research is more or less meaningless.” He added, of the city rankers, “I’m sure their research is good and honorable, but it’s aimed at a very limited client base.”

Expats move in their own economy in some cities. Luanda, Angola, for instance, has at times ranked as the world’s most expensive city, including by ECA in 2009. Jon Copestake, the London-based editor of the Economist Intelligence Unit’s Worldwide Cost of Living Survey, called it a “hostage expatriate market,” in which “retailers can charge what they want, and they do.” Luanda is no longer included in the EIU’s ranking — the latest of which was published this week — but if Luanda were included, it “would be close to the top,” Copestake said.

“We’re not comparing it to a local person in Luanda,” Kilfedder said. “We’re not saying you’re going to live in Luanda as a local Luandan.”

Not all expats will replicate their previous spending habits in their new home country. “The way people shop does change,” Kilfedder said. “But people generally will try to re-create their shopping style in the country they move to. They will be seeking similar products, and a similar standard of products, around the world.” ECA shares with clients alternative indexes under the assumption that people will change how they shop according to local availability and tastes, but doesn’t publish those, Kilfedder said.

Local residents also tend to get paid in amounts that reflect local prices, so cities that appear inexpensive to outsiders may not be to locals. For instance, the typical Mumbai resident must work far more hours than the average New Yorker to afford a Big Mac or iPhone, according to UBS, even though all the rankings rate New York more expensive than average, and Mumbai among the world’s most inexpensive cities.

“For local people, who are paid in local currency, it’s not that relevant,” said Nathalie Constantin-Métral, Mercer‘s cost-of-living product manager, of the city rankings.

The city rankers use a number of different strategies to gather local prices. ECA pays expats and local agents, and also sends its own data collectors to comparison-shop far-flung locales. “They’ve been to goodness knows how many countries around the world collecting prices,” Kilfedder said.

The Council for Community and Economic Research, a U.S. nonprofit that gathers local cost-of-living data, relies on cities’ chambers of commerce as well as colleges and universities, said Dean Frutiger, project manager for cost-of-living research at the group’s parent organization. Then the council weights the data based on the spending habits of the top 20% of earners. “We do have other data products that include other demographic groups but they’re not published,” Frutiger said. “They’re private subscriptions.”

Researchers try to maintain the same set of goods from year to year, while adapting to new product lines. “We used to price VCRs, then DVD players, and now we price Blu-rays,” Kilfedder said. “We used to have video rentals, and we don’t anymore. We used to price normal light bulbs, and now it’s energy-saving light bulbs. The types of televisions change enormously. We now price larger, thinner televisions than we used to. The basket always has to stay relevant and up to date.”

ECA also prices rent, but doesn’t include it in the rankings. That’s because many companies — 62%, according to a ECA survey conducted late last year among 368 companies — pay for their expat workers’ entire housing costs. Including housing costs in the rankings is “double-counting,” Kilfedder said.

Currency-market movements have a big effect on the rankings — “a greater impact than price inflation in the various countries,” said vom Hove, who called this “the major flaw” of the rankings.” Last year, “the euro lost quite a lot of value compared to the dollar, therefore European cities became cheaper. Since the beginning of the year, the euro has strengthened again, quite considerably. The next research will move European cities up again” in cost.

“I wouldn’t say that’s a weakness,” Kilfedder responded. “You can’t ignore exchange rates when moving between countries. It’s a very important factor that has to be taken into account.” How about for expats who are paid in local currency? “You might send money home, you might travel home,” Kilfedder said. “There are a lot of links to the home country.”

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